Sizing Things Up

Depending on whom you talk to, Texas-born small-business
advocate Lloyd Chapman is either a modern-day Cesar Chavez or a
conspiracy theorist with a grudge. Either way, as the SBA has
learned, he's become hard to ignore.

In late 2004, Chapman and his organization, the American Small Business
League, spearheaded an investigation into a series of flaws in
the SBA's contract procurement process, culminating in a
lawsuit. Since the end of 2004, at least five reports from three
different government agencies--the Government Accountability
Office, the SBA Office of Advocacy and the SBA Office of the
Inspector General--have noted irregularities in the SBA's
system of awarding small-business contracts, prompted in part by
Chapman's incessant lobbying. The agencies' findings allege
complacency at best, borderline fraud at worst.

The ASBL complaint focused on the SBA's refusal to offer up
a draft of a 2003 report that highlights serious discrepancies in
the awarding of federal contracts. Chapman sued for the data,
claiming the agency was hiding blatant contracting fraud by
releasing only an edited version of the original document. The SBA
initially appealed a judge's order to release the paper, but
eventually acquiesced in June. The draft report, conducted by
research firm Eagle Eye Inc., shows that in 2002, "$2 billion
in contracts coded as small-business awards went to 39 firms
designated as large businesses," and lists possible vendor
fraud as one of the causes.

The SBA Office of Advocacy's John McDowell is quick to
defend his department's actions. "There is nothing
sensational about the draft as compared to the final product,"
McDowell says. "All our edits were designed to eliminate
speculation and produce a quality report grounded in sound
data."

Chapman points out, however, that none of the companies has ever
been prosecuted for falsifying their claims, despite a provision in
the Small Business Act that lists intentional misrepresentation as
an offense punishable by up to 10 years in prison.

According to the SBA, no action has been taken against these
companies because the mistakes were simple company coding errors,
not unusual for a database containing thousands of names. The
complexity of the SBA's Central Contractor Registration
database system--which, until April of this year, relied on
self-reporting--only serves to exacerbate the problem.

Furthermore, enforcement of size standards occurs only when a
company's size classification is protested by a contracting
officer, another bidder or the SBA itself. In 2002, the SBA
processed 383 of these protests, of which 29 percent were dismissed
on procedural grounds. Of the remaining cases, 85 firms were found
to be misclassified.

Earlier this year, the Department of Energy was singled out
after a GAO report showed it had vastly overestimated the number of
contracts it was awarding to small businesses. Prompted by the
findings, Sen. Olympia Snowe (R-Maine), chair of the Senate
Committee on Small Business and Entrepreneurship, urged the DOE to
work on fixing the problem. In response to pressure from the
committee, the DOE agreed to better police itself.

For its part, the SBA is eager to assuage critics and spent the
summer struggling to repair its image in the U.S. small-business
community. It held a series of hearings to gauge sentiment on
issues, the most important of which was its proposed size-standard
changes. The SBA wants to switch to a standard based strictly on
number of employees, abandoning the current mix of size- and
revenue-based indicators.

But changing the standards may not be the answer. Paul Murphy,
author of the original Eagle Eye report, says of the proposal,
"Our analysis concludes that on average, the proposed
revisions will harm the truly small and emerging businesses by
reclassifying a group of larger contractors that exceed revenue
standards but not the proposed new labor standards."

After holding a hearing in her home state of Maine, Snowe, too,
urged caution: "Any reform of this system must be fair to
businesses of every size, help them grow to become competitive in
national and global markets, and give due regard to the unique
circumstances of the industries in which they compete," Snowe
said in a statement.

It's likely the discussions will carry on into 2006 before a
compromise is reached.